Q2 earnings outlook the most negative since 2001

ReginaHing

NEW YORK (MarketWatch) – Companies are wrapping up their most negative earnings outlooks for a single quarter in more than a decade, led by Ford, Procter & Gamble and others that took a beating in moribund international markets.

As of June 29, the second quarter’s last trading day, 94 companies in the S&P 500 Index have issued negative guidance versus 26 positives – the most negative period since the third quarter of 2001, when there were 180 negatives and 30 positives, according to Thomson Reuters I/B/E/S.

Markets power higher on EU optimism

That means for every company that issued a positive outlook for the second quarter, 3.6 have brought down their numbers. The long-term ratio is 2.3.

A positive guidance means the company is projecting earnings per share higher than current consensus estimates, and a negative indicates EPS is lower.

“The most common explanation we’ve seen is the situation in Europe,” said Greg Harrison, corporate earnings research analyst at Thomson Reuters. “A lot of these companies have been depending on international growth, so there’s definitely concern for any company selling in other countries.”

According to Thomson Reuters, an average of 122 out of the 500 companies in the S&P 500 have issued quarterly earnings guidance over the past two years. Many others do so only as needed.

Ford Motor Co.
F, -0.12%
on Thursday said it now expects second-quarter losses to be triple that of the first quarter, mainly because the situation in Europe has “deteriorated significantly” and the automaker is battling competition and pricing pressures in South America.

Procter & Gamble Co.
PG, -0.94%
last week lowered its guidance – the second time in two months – citing softness in Europe and China and a negative impact from foreign exchange rates. Philip Morris International Inc.
PM, -1.99%
also blamed an unfavorable currency rate as it reined in expectations for its full-year earnings.

Among the sectors, Consumer Discretionary is faring the worst, registering 20 negative guidance and only 1 positive as of June 29.

Shopping habits of Chinese consumers

(2:51)

A new study about Chinese consumers show that they may be brand conscious, but not necessarily brand loyal in the supermarket aisle.

How accurate are company-issued forecasts? In a report, Thomson Reuters said that on average, company-issued negative guidance is significantly less accurate than initial analyst estimates – its finding shows that analyst estimates are typically higher than actual earnings by 2.7%, while company guidance is lower than actual earnings by 7.6%.

This implies that when a company decides to give negative guidance, it tends to be very conservative so as to avoid the possibility of missing an already-lowered target, the research firm said.

Still, Harrison says he doesn’t see many companies lowering the bar just to beat estimates.

“The stock price gain companies achieve [when they beat] is likely to simply reverse the hit the stock took when the company steered guidance lower in the first place,” he explained. “Strategies of guiding lower [cause] negative returns on average.”

Keeping pace with companies’ pessimism, analysts polled by Thomson Reuters now project second-quarter earnings in the broader S&P market to notch a 5.8% gain over the same period last year, down from the 9.2% forecast in April.

Not everyone, however, is buying into analyst estimates.

“It’s a head fake. They’re worried about the fiscal cliff, they’re worried about Europe … It’s like people continue to predict the recession, which isn’t happening,” said Jeffrey Saut, chief investment strategist at Raymond James and Associates.

Saut said the current quarter is mirroring a pattern he noticed last year and in the May to June 2010 period, when earnings outlooks collapsed but the stock market shot up after taking an initial hit.

“[Analysts] revise their earnings down dramatically in the summer, and they always scramble to raise them back up,” Saut said. He added that a collapse in the price of gasoline and a stronger home-building sector will put a lot of money in the hands of consumers.

But at this stage, it’s pointless to worry about what this reporting cycle brings, says John Butters, senior earnings analyst at FactSet Research. “Once the companies start reporting, the focus immediately shifts to third-quarter guidance. There’s this expectation that things will get a lot better in the second half of the year,” he said.

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.